Charles Geisst is a professor of finance at Manhattan College and the author of many books on Wall Street and financial history. Here, he talks about the forces at work in the telecom bubble of the late 1990s and the way Wall Street investment banks propelled the boom. He also discusses the merger of Citibank and Travelers in 1998 to create Citigroup, the world's largest financial insitution, and the repeal of the Glass-Steagall Act in 1999. As for the prospects for reforming Wall Street and restoring the trust of investors, Geisst says, "I think the consumer is still concerned about what generally is known as insider trading. They feel that people on Wall Street know something they don't. As long as that's the case, they're not coming back to the marketplace." This interview was conducted by FRONTLINE correspondent Hedrick Smith on Feb. 5, 2003.

So was this a Wall Street-induced boom?

In many respects, it was. Wall Street discovered -- probably in the 1960s and the 1970s in the more contemporary period -- that a fair amount of money could be made through mergers, and it was actually much more profitable in some respects than underwriting stock. Not in all cases. But it was done for fees, which could be a portion of the deal. So the larger a deal, the more fees its investment bankers would make. In the 1990s, that just became a boomtown bonanza, if you will, because the deals were upward of between $10 billion and $40 billion. Even a couple percentage points off that for fees could make a very good year for the average Wall Street firm.

So how were Wall Street bankers doing -- the investment bankers in particular, and the people linked to them, like Jack Grubman?

For the investment bankers, I think the 1990s, the chapter of any new book could be "the decade of the investment banker." We generally tend to think of it as the decade of the small investor, which it also was. But the investment bankers probably did better than anyone else. There are several analysts, bankers, combinations -- depends on what side of the coin they were -- who had been reputed to make upwards of $100 million themselves, personally, in the 1990s.

Year by year?

Yes, in some cases. Where some others were a little slower and just made $100 million in total between 1995 and 1999 -- which isn't bad either -- maybe $20 million dollars a year.

But as a result of all that, Wall Street picked up a reputation which it hadn't had since the 1980s, as the center of greed and avarice, if you will. But the market was so strong that the nickname never stuck. So "the decade of greed" was reserved for the 1980s. The 1990s simply became "the boom." ...

How would you characterize the 1990s in terms of the boom? Was it a decade of greed?

Oh, absolutely, sure. Deals were done purely on the basis of how much they could generate in investment banking fees. Therefore, if a deal could be done at $10 billion, it was a lot more profitable for everybody else at $15 billion. So investment bankers would induce companies to pay up for an acquisition.

Make the deals bigger?

Make the deals bigger, which increased their own fees.

There was that Fortune magazine cover that said, "They Sold, You Bought." There was a rogues' gallery on the cover of telecom CEOs or chairmen and so forth, who took out, according to that article, $60 billion, while ordinary investors were losing $1 trillion dollars. Was this an insiders versus outsiders game that went on in the 1990s?

There's a saying on Wall Street that, when the small investor gets in, it's time for everybody else to get out. I think that's exactly what happened. There's always been a news lag, if you will. A deal may be announced in day one, for instance. The investment bankers knew about it since day minus five, that it was coming. The smaller investor gets it on day 360, and by that time, the investment bankers know it's time to get out. That's always been a standard rule. ...

Did the small investors get taken in a big way while the insiders on Wall Street were making hay?

Yes, the small investor got taken badly, because there were certain Wall Street practices -- including what they call "ramping" stock prices up -- which were obviously occurring, while the small investor was a bit late getting into the trend. ...

In other words, it appeared that certain investors were given inducements -- large investors, corporate chiefs, whoever it happened to be -- by investment bankers and their investment banking houses. They were given stock on a new issue, which of course would explode in price quickly thereafter.

Then small investors would come in; many of whom would not be allowed to get out very quickly. They'd be left holding the bag. ...

Tell me about telecom for a moment. A lot of people have written and talked about the dotcoms and that whole phenomenon, the Internet, and that's important. But telecom was also a huge boom-and-bust sector. What was telecom? What was a company like WorldCom for Wall Street?

The telecom boom of the 1990s was portrayed very much as the next railroad. This was the next place that technology was going to revolutionize American life. Many people got in on it for that reason, and people who were putting together telecom companies, such as Bernie Ebbers, recognized that fully.

How does Bernie Ebbers see Wall Street, and how does Wall Street see Bernie Ebbers?

I think they have symbiotic relationships. Bernie Ebbers sees Wall Street as some place that can sell his dream. They saw him as a new prophet of a new industry that can sell their dream of a new technology which will make everybody wealthy, change the world and change the economy.

So I think they work essentially together. He wasn't essentially, by background, a Wall Street guy. But he was in an industry which Wall Street recognized had a capital "G" for "Growth" in front of it.

But it needed enormous money.

[It's a] capital-intensive industry ... meaning that it requires large amounts of long-term capital, whether it be stock or bonds. [And a] capital intensive industry needs Wall Street and Wall Street needs them, because that's their bread and butter, issuing stuff like that, securities like that. They go together very easily. ...

Talk for a moment about the telecom bubble itself. There was almost a frenzied quality to it. The Telecom Act of 1996 comes along. Does that set loose the frenzy, or is it already under way?

Well, it's already under way, because most people on Wall Street and in the industry know that the deregulation is coming. So the deals can be done as they are in many industries, not only telecom. The financial service industry is much the same way. Everyone knows that, unless something catastrophic happens, new legislation is coming which will essentially deregulate the industry, and deals start getting done before that.

So it makes it look as though the legislation follows Wall Street, which in many cases is true. But once the ball gets rolling, it's very difficult to stop. ...

So does the Telecom Act of 1996 matter? Is it a spur to growth?

It's an afterthought. ...

When do you see guys like Jack Grubman, who were following the industry on behalf of Wall Street, realize that something has really cut loose? Does it go all the way back to the -break-up of AT&T and the Green decision of the early 1980s? When does telecom begin to just [take off]?

Telecom breaks free with the break-up of AT&T. I think it's important to understand that, although the government, the antitrust division, pursued AT&T, eventually, at the end of the day it was AT&T's decision to go along with the break-up. They weren't forced to do it, as had been the case in American antitrust law before.

I think that when that occurred, most people in the industry, in the small companies, like MCI at the time, realized that the door was open. There was an opportunity for them, and it was a golden opportunity. ...

Could Bernie Ebbers have done it without AT&T opening the door to their lines?

No. Bernie Ebbers wasn't a telecommunications guy. He was just somebody who sat down, opportunistically, in the early 1980s, saw an opportunity, and said, "I'll go into this business, because it's being deregulated. AT&T is obviously capitulating. This is a good place to be."

This is very much like someone who is in manufacturing industry who decides to make telescopes, because Haley's Comet is coming. He may not know much about telescopes, but the comet will sell his product. ...

Now, let's step back and take a look at the banking side ... the idea of the superbank. What's been happening to [regulations] over the years which say investment banking and commercial banking should be separated for the safety of the economy, business depositors, and investors? ... The Glass-Steagall Act [of 1933] pretty well says different parts of the financial services industry should be split up, and the Bank Holding Company Act [of 1956] keeps insurance out. So there's banking, there's the securities business, and there's the insurance business. What changes that?

Well, over the years, the United States -- unlike most other highly developed countries -- had more banks per capita than any other country in the world. For instance, in the 1920s, during the banking crisis leading up into the Depression, 14,000 banks in this country closed. There were about 14,000 banks still operating in this country in the early 1980s -- individual banks, not including branches -- just individual banking companies.

That number declined to about 10,000, which is still an awful lot of banks -- 200 different banking companies per state by the mid-1990s. So as a result, bankers and regulators with their hearts in the right place thought that we were quote-unquote "over banked," and that maybe some of these services could be rationalized in terms of cost efficiency or whatever. Not a bad theory.

So, in other words, before 1999 when the Financial Services Modernization Act was passed [repealing Glass-Steagall], we already had it in mind to try to change this industry. So the ball was already rolling then.

Alan Greenspan. ... He plays a very important role at the Federal Reserve. ...

Alan Greenspan is central to the change in banking that we saw in the 1990s. In the 1980s, before he became Fed chairman in 1987, he was on the board of J.P. Morgan. And J.P. Morgan & Company was one of the institutions which was pushing hardest for a change in the banking laws. [They] had wanted to get into investment banking, having been at that time a commercial bank.

By 1989, Alan Greenspan, at the Fed, began a new interpretation of existing banking laws, saying that banks ... could not earn more than 10 percent of their revenue through securities operations. ... [By 1996] ... the new interpretation, as Greenspan allowed it [in 1996], allowed 25 percent.

That's what opened the door to the bank amalgamations of the 1990s. ...

How important is Alan Greenspan in the changing and revising of America banking laws in the 1990s [leading up to the repeal of Glass-Steagall]?

Without Alan Greenspan, [we] wouldn't have changed the laws when we did. There had been impetus to change them for years, but he became the catalyst for the change.

When he was a director of J.P. Morgan & Company in the 1980s, Morgan produced a pamphlet called "Rethinking Glass-Steagall," in 1984, which he was obviously privy to and had contributed to. That pressure by Morgan had been building for years.

What was that pamphlet advocating?

The pamphlet was advocating getting rid of the Glass-Steagall Act and the separation between commercial and investment banking, so that commercial bankers particularly could begin to underwrite corporate securities again, as they hadn't done since before 1933.

While it was clear that the Fed had limited power in this regard, it didn't have authority to administer the Glass-Steagall Act. ... [But] the Bank Holding Company Act clearly said that the Fed had the ability to allow or disallow certain commercial banking activities. By looking at the loopholes, Alan Greenspan began to allow commercial banks -- including Morgan at the time, and Citibank -- into the corporate securities business on a limited basis.

That began to increase as the 1990s rolled on. By the mid-1990s, most commercial banks were avidly involved in the securities business by opening their own subsidiaries, and then by buying investment banks, merging. In other words, a merger trend within the overall merger trend. By late 1997, 1998, the ball was already rolling to turn this into law.

You have a succession of decisions -- first 5 percent, then 10 percent, then 25 percent [of a bank's revenues can be from securities underwriting]. So the Federal Reserve Board, mostly under Alan Greenspan, is opening up loopholes in the Glass-Steagall Act?

Yes, he [has the] authority under the Bank Holding Company Act to allow commercial banks to begin earning 10 percent, then 25 percent afterwards, of their total revenues from securities operations -- either the underwriting, or the trading of corporate securities. This is allowable.

But what they can't do -- what the Fed can't do -- is to allow a total remarriage of the two. So in other words, it can do this functionally, but it can't change the structure of the industry. ...

But de facto, if a bank can do 25 percent of its business in investment banking, doesn't that pretty well wipe out the old law? ... What you're saying is that the decisions of the Federal Reserve Board under Alan Greenspan essentially wiped out the effect of the old Glass-Steagall Act?

Single-handedly, the Fed got rid of the Glass-Steagall Act over a period of about six or seven years. That preceded the actual change in the law, which came eventually, after the fact, in 1999. ...

So along comes Sandy Weill, wanting to form the megabank, with securities and banking all under one roof. ... What was Sandy Weill after? What was in his way?

Sandy Weill was after a large financial institution, all services. What was in his way was the Glass-Steagall Act. The way around the Glass-Steagall Act, given that, obviously, the only way to get rid of a law is to have Congress repeal it, was to get the interpreter of that law -- in this case, the Federal Reserve, through the Holding Company Act -- to interpret it liberally.

So over the next decade, as it turned out, the laws would be interpreted liberally. He could start to forge this large financial empire. And he was not alone. Large empires like this could be forged with the Fed's imprimatur. ...

Was it the death knell of Glass-Steagall when the Fed approved the merger of Citibank and Travelers [in 1998]? ... How would you characterize the merger between Citibank and Travelers in terms of its impact on banking laws?

This created an environment which hadn't been seen in this country since the 1920s. There was the joining of different financial services under one roof. The merger of Travelers and Citibank overcame several securities laws, banking laws, as well as state insurance laws.

Before this merger, it was forbidden for insurance companies, banks, investment banks to have anything to do with each other than at an arm's-length relationships, in terms of selling securities or providing financial services.

So it wasn't only the marriage -- the remarriage, if you will -- of commercial and investment banking. It was bringing life insurance into the mix, which is almost equally as radical, although life insurance isn't considered as sexy an industry as the other two, so it was ordinarily left out of the conversations.

How does this get done? Do you have any idea how this happened? Does Sandy Weill, the head of Travelers, go down to Alan Greenspan, the head of the Federal Reserve, and sound him out quietly to see if this will happen?

Yes. There was a fair amount of sounding out by bankers at the Federal Reserve as to the Fed's reaction to many of these moves. What's ordinarily forgotten is that, for instance, many senior New York bankers, money-center bankers, sit on the boards of the local Federal Reserve banks in their districts. Sandy Weill was made a director of the Federal Reserve Bank of New York board of directors in 2001. So it's not unusual for a senior banker to simply call the Fed and ask them their opinion, and that went on throughout the 1990s. ...

What do you know about Sandy Weill's contacts with Alan Greenspan before asking for the Fed's permission? ...

Weill made several phone calls to the Fed, asking for Greenspan's opinion about changes in the banking laws. I believe [Weill] was told more than once that what he had in mind was not out of the question, that it was in sync with the Fed's current policies of allowing the two sides of the industry to rejoin. ...

There's records of Weill having contacts with Greenspan when Travelers-Salomon Smith Barney, that combination, was starting to talk to John Reed at Citibank. ... The Fed was made aware of those discussions, so that there would not be any surprises involved, because that would have been a enormous merger. It was an enormous merger in anyone's estimation. ... It was not something which was going to be simply sprung on the Fed. It would have to be vetted in advance. ...

What do you think Sandy Weill sees in this superbank?

Part of the fear in the 1990s of American bankers was that some of them, because of the new relaxed atmosphere, were going to be absorbed by foreign banks. There would be no prohibition against that unless the foreign bank came from a place which we considered undesirable strategically or militarily. ...

Deutsche Bank had been on the prowl in the 1990s, looking for acquisitions. The idea, for instance, which was broached several times, of Deutsche Bank buying Citibank, in terms of deal making would have been wonderful. But a combination of the largest German and the largest American bank wouldn't have gone down well in Wall Street or banking circles.

So as a result, deal making became important. Amalgamations became important. Citibank by itself was actually vulnerable. Citibank including Travelers and Salomon Smith Barney was much less so. Its capitalization was much larger.

So part of the fear was that foreign banks could come in and start to encroach, poach on the American banking industry. In that respect, then, mergers would be allowed amongst the American institutions, because it would make them stronger financially. ...

Where does [Weill] get that vision? When do you first see it in Sandy Weill?

Weill, almost from the beginning of his career in the late 1950s, early 1960s, was a deal-maker. Every time that his companies, the small brokerages that he originally began, got larger, it was because he had bought other brokerage firms, whether they had been failing or just needed infusions of capital.

I think Weill is probably the best example of someone in the 20th century, other than J.P. Morgan, who understands growth through deals, rather than starting from the ground up and building a product or a service. ...

So in the 1990s, when Sandy Weill is talking about a financial supermarket, what's his dream? What's driving him?

I think what's driving him is the realization that, as most people understand, the country has changed. You can't build businesses from scratch any more. There's too many financial services companies, there's too many banks. ...

So in other words, if one wants to get larger, one buys someone else. The regulatory environment is a lot looser than it was in the past. This is going to be possible. There's a very strong bull market, which means a lot of the acquiring companies' stock, including his own, were high. So you could do stock swaps, and create great value as a result.

Does he just want to be king of the hill, or does he want to create something special?

I think the motivation clearly is to create something which has never been created before. I mean, American financial history has legends and lore of its own. One is that some legendary deal-maker will create the largest type of company of all, whatever it happens to be. J.P. Morgan did that in 1901 with U.S. Steel, which at the time took the country by storm and dominated the news for several years afterwards.

I think Weill's in the same vein -- to create the largest financial conglomerate, if you will, of all. And he said after, in several annual reports after the merger of Citi and Travelers, that he was only beginning. The deals were still there. They could still be done.

So I think it is the concept of creating something which has never been there before. ...

To go back to your early comments about Wall Street and what's going on in the late 1990s, the hot part of the business is investment banking. Do you see Sandy Weill at all over-encouraging Salomon and the investment banking side when this gets put together? Isn't the whole idea of cross-marketing, and so forth, bringing Citibank and Salomon Smith Barney together? ...

I think that investment banking is the center of his universe, of his business. ... I mean, Weill is essentially an investment banker. So I think whatever happens to Citi in the near future or in the long term will be driven from the investment banking side.

How about in the late 1990s? What was happening? The growth edge in Citigroup was investment banking. What was going on in the late 1990s? What was the hot sector for Sandy Weill? ...

Again, investment banking in the 1990s was the premier financial service in this country. So in other words, investment bankers were doing an enormous amount of underwritings for existing companies, IPOs, mergers and acquisition deals on the behalf of others. This is essentially what Wall Street calls "fee banking." Fee banking was the most popular and profitable part of financial services -- by far.

For Wall Street and for Sandy Weill?

Yes, for both. ...

So telecom and a guy like Bernie Ebbers becomes central to the takeover strategy and the merger strategy at Citigroup?

Organizations like WorldCom in the telecom industry fit perfectly the trend which was occurring in financial services. ... The new superbank which Weill was creating was capable of loaning money from the commercial bank to make a loan, for instance, to WorldCom or others; then, once the operation was on its feet or a little bit stronger, would then underwrite securities for it under the same roof.

This is exactly the sort of service that industries -- capital-intensive industries, like telecom -- needed. Ebbers needed this sort of service clearly. He needed stand-by lines ... and then the ability of the same banker to underwrite stock. ... When one shows decent results, it's time to issue new securities. And this is best done by an institution like Citigroup.

So what you're saying is then that telecom and WorldCom represented the ideal client for Sandy Weill's bank, and Sandy Weill's bank represented the ideal across-the-board service for a company like WorldCom and Bernie Ebbers?

That's right. This was the 1990s version of companies which hadn't been seen before -- except to be called conglomerates -- in the past. These were companies which performed more than one function. The bankers needed customers who were like them, and customers needed bankers who were like them, in turn. They were a perfect fit for them. ...

It seems almost as if the planets were all perfectly aligned at one point in the late 1990s, for telecom, for Wall Street, even in Washington.

Yes, if anyone could have scripted it or planned it, it worked out perfectly well. The new sort of bank that had all sorts of services under its roof had found clients who needed massive amounts of capital and needed both types of banking services from that particular bank. So everybody was happy. In other words, as if the new economy had found new institutions, new companies, new products and everything converged.

Everything converged. But it's also specific to people like Sandy Weill and Bernie Ebbers. Weill is on top of the biggest pyramid in Wall Street. Ebbers is riding the hottest rocket in the biggest growth sector in the economy. ... It's epitomized by these people, isn't it?

Yes, indeed. In fact, it becomes very clear that investment bankers have to start serving commercial bankers, and commercial bankers serve investment bankers. In other words, the sorts of things we thought in the past might have been prohibited in this sort of environment now become a little bit more accepted. Standards become a little more relaxed. We've created monster institutions on both sides of the coin.

In this convergence of boom forces, what do Sandy Weill and Bernie Ebbers represent?

Sandy Weill represents, in this new economy, if you will, the epitome of the new type of banker, who's constantly looking ahead, wants to add new services for the public, for his corporate plans.

Bernie Ebbers appears at the time to be the sort of person that wants to offer increased telecommunication services to everyone. In other words, they're sort of the renaissance men on a white horse, riding at full steam. ...

To go back to Glass-Steagall, you said effectively that the decisions of the Federal Reserve had pretty well washed away Glass-Steagall. Nonetheless, does Sandy Weill need legislation to put Glass-Steagall in a coffin -- to kill it?

Yes, he does. ...

Did Sandy Weill push for legislation in Congress? And why?

Certainly, Citigroup pushed for legislation to get rid of Glass-Steagall, pass what was called HR10 at the time, which became the Financial Services Modernization Act.

Part of his deal with the Federal Reserve was to get rid of all Glass-Steagall violations in the new Citigroup within two years. Otherwise, he would have been faced with a divestiture of a company which had just been put together, because of an old law which is still on the books. So it clearly behooved him and many other people in the financial services industry, who wanted to accomplish essentially the same sort of thing in the future, to push to get Glass-Steagall repealed. ...

So Citi and Travelers [which owned Salomon Brothers] got approval [from the Fed] for their merger with the condition that they fix themselves within two years. So what did that mean to Sandy Weill?

That meant that he essentially had to make sure that the divisions which he had joined, Citi and Salomon Brothers, which were a clear violation of the Glass-Steagall Act, had to either conform to the Glass-Steagall Act -- which would have been impossible to do, because obviously they were a new creation -- or get rid of the Glass-Steagall Act.

So in that particular equation, the Glass-Steagall Act has to go. It's not a matter of conforming to it, although that was the Fed's deadline. The Glass-Steagall Act had to go.

So they pushed hard?

Pushed very hard. ... They pushed so hard that the legislation, HR10, House Resolution 10, which became the Financial Services Modernization Act, was referred to as "the Citi-Travelers Act" on Capitol Hill. It wasn't referred to as HR10. Universally, it was called the Citi-Travelers Act. ...

Did the Fed's approval of the Citibank-Travelers merger really give impetus to Congress to pass the act?

Yes. Without the Fed's approval, Congress would have probably dragged their feet. There was a lot of bickering, a lot of lobbying from different sides, from different sides of the industry, for or against the act.

But once the Fed gave its imprimatur, it was only a matter of time before it would fall. Part of this had to do with the general halo effect around Alan Greenspan on Wall Street at the time. ...

What was the impact politically on Congress of Sandy Weill's pushing for repeal of Glass-Steagall?

When Weill clearly wanted to get rid of Glass-Steagall so that his new organization would survive, many in Congress -- important folks in Congress, who had previously been opposed to modernizing legislation -- decided to get on board. [Senator] Paul Sarbanes was one of them.

Previously, they had objections to parts of the new act, the insurance-investment banking-commercial banking link. Now, they mostly jumped in line, because they realized that a new organization like this, if properly managed -- which was part of Citi's argument -- risk management techniques were such that they could manage without having to worry about out-of-date, antiquated laws. They got on board.

They were brought into the stream by the same sorts of arguments which Alan Greenspan had been making for the past 10 years, which Weill had been making and others, Merrill Lynch, had been making. I think they realized if they didn't get on board, they could be seen to be getting in the way of financial progress.

What made Sandy Weill so influential with Congress?

His success. In the past, for instance, it was clear that investment bankers sometimes would love to get a hold of insurance companies, because insurance companies are purchasers of long-term securities, which investment bankers underwrite.

That was a field that was much too close for most regulators for years. Sandy Weill proved that when, for instance, Smith Barney and Travelers could join up and succeed, that the old prohibitions maybe were based on politics from [the past] which were no longer valid. His success was showing people that the old law was exactly that, it was antiquated.

Did he do much personal lobbying? Phone calls to key members of Congress, like Paul Sarbanes, and what-not?

Yes, his organization did. ... In the year previous to the Financial Services Modernization Act, the thing that overruled Glass-Steagall, Citibank spent $100 million on lobbying and public relations, which is a good indication.

And most or all of that to repeal Glass-Steagall?

Yes. They spent a small fortune, a king's ransom, if you will, getting rid of Glass-Steagall. In fact, when thrown in with other financial firms, lobbying, it was closer to $200 million over the short period of time. ...

A lot of money?

Extreme. ...

Did consumers benefit from this? Did retail investors benefit from the formation of the superbank? What's the payoff been for the ordinary client?

In most banking mergers, the assumption is that the retail people, the consumers, will benefit by lower fees, perhaps faster access to the services. That takes a while to work out. ... Doesn't seem to have happened yet, and in some of the previous mergers -- between Chase and Chemical, for instance -- it was never really adequately proven that fees actually dropped. In fact, in some cases they rose after the merger.

So in other words, a good number of these mergers are for their own sake, rather than the consumer's sake, which was the argument to begin with. ...

What do you make of the settlement that Eliot Spitzer and the regulators have made with Wall Street?

I think that the settlements that Spitzer made are a step in the right direction, in that he clearly stole the thunder of the SEC, which was proceeding much too slowly.

The actual fines themselves are not substantial enough. They're literally slaps on the wrist. It may be argued that Merrill Lynch paid $100 million for their transgressions. But as it turns out, $100 million isn't worth very much in the post-1990s environment. If the fine had been more like a billion for one of them, they might have taken more notice. A hundred million dollars is pocket change.

But in terms of the really big problems that came up -- the conflicts of interest, guys like Jack Grubman, and the IPOs -- have the structural problems been resolved? Is Wall Street fixed?

No, hardly. I mean, Wall Street's problems are now better known than they were. ... But the structural problems are still there. ...

The separation of analysts from investment bankers now is recognized as something which is necessary. But I don't think there's anything in place so far which is going to actually prohibit someone from the research side who wants to influence investment banking from doing so. ...

I guess the critical question about the settlement is, has the settlement restored public trust in the marketplace?

No, I don't think so. Public trust is usually earned by a long period of time, when the public feels that they can invest, deposit money without repercussion. We haven't had that. The new laws which have been put in place to separate analysts from the investment bankers, the fines which have been leveled, are just not substantial enough.

It's doubtful that the public would take time to understand it, which is the other side of it. What the public generally recognizes is imprisonments and very stiff fines, which of course may work, but it wouldn't make Wall Street very happy.

So is one of the problems there hasn't been a serious criminal prosecution?

Yes. I think that probably if someone were actually dragged, if you will, in handcuffs, as Richard Whitney was in the late 1930s, president of the New York Stock Exchange, and put in prison -- he was put in Sing Sing for embezzlement at the time -- that's the sort of thing which catches the public's attention, not simply the $100 million fines.

So you think the regulators have pulled their punches, not hit hard enough?

I think they've pulled their punches, and they haven't hit hard enough. ... The state securities authorities and banking authorities want to have a say on some of this, as well. So therefore, maybe some of the other states who initiated, like New York or the SEC, are sort of standing back and letting the others have a turn at the punching bag. The net effect may be that all these are just small body blows, but nothing serious.

You mentioned conflict of interest several times. What's the heart of the problem on Wall Street, from the standpoint of the consumer?

I think the consumer is still concerned about what generally is known as insider trading -- somebody knows something that they don't. As long as that's the case, consumers are not going to come back with their money. ... I think that they feel that people on Wall Street know something they don't. As long as they continue to do that, they're not coming back to the marketplace. ...

There's a feeling that there's an insider's game that stacked against outsiders?

That's right. It's an insider's game, which is stacked against the outsider from top to bottom, from the beginning to the end of the process. And there's no reason to ever believe that anyone would think anything else, on the basis of what they've seen.

Analysts pushing stocks they shouldn't have been pushing, firms running up the price of stocks they shouldn't have been running up -- all sorts of stuff. There's just no end to it, I think, and as a result, the investor feels maybe the bank isn't a bad place to be.

On the basis of the 1990s experience, yes. I mean, the business model from the very beginning was to portray companies which probably weren't as strong as they were portrayed to be as good investments.

There was obviously some manipulation of stock prices along the way to make those companies perform well in the marketplace. Then obviously a lot of executives and Wall Street people were getting out of those stocks when they hit their highs. That's a corrupt business model from beginning to end.

What about a guy like Jack Grubman? He's touting stocks that maybe he doesn't think are so great. He's certainly touting stocks that pay off enormously for his company. He's got the built-in conflict of interest. What does he epitomize on Wall Street in the 1990s?

As far as I'm concerned, Grubman epitomizes what the Glass-Steagall Act was trying originally to prevent -- a crossing over from one side to the other. He has shown that investment bankers and commercial bankers aren't quite as comfortable under the same roof, when they start actually to get down to work, as we would like to believe.

We tend to look at these things in terms of structure only. We reunite the two sides, and everybody's happy. But the function is something else, and Grubman has proved that what we say may not be what we do.

Is Grubman unique, or does he typify a widespread practice on Wall Street?

I think he typifies a widespread practice. After the mid-1990s, there was probably no attempt by most Wall Street houses to control analysts. Analysts at one time used to say what they meant, and it was accepted.

Since [the mid-1990s], no one on Wall Street has really said anything unpleasant about a potential investment banking client. I think that gives a pretty good idea of what they've learned from their own history: flatter your client, and don't analyze them.